The S&P 500 closed the day and 2011 at 1,257.60, down .04 points (0.0%) from where it started the year and down 7.8% from an April high, but up 14.4% from an October low.
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The 2011 close is pretty remarkable, being equal to the 2010 close almost to the exact penny. Other common measures have done a little better or worse. Nasdaq was down a few % (so much for that talk of a tech boom) and the Dow was up a few %. Bonds did quite well in 2011 with treasuries up double digits.
I’m cautiously optimistic for the U.S. economy in 2012. The trends have been in the right direction albeit modest. But the rest of the world, especially Europe and China, is looking pretty rocky, and I hope that does not drag us down. Emerging markets were clobbered pretty badly in 2011. And if the Repubs take the white house or both houses of congress, look out for a dismal several years as we join the austerity madness.

The change in the S&P 500 index only tells part of the story. Those are the largest cap stocks, which tend to pay relatively high dividends precisely because they are not expected to have the same growth rates (and increases in share price) as mid and small caps. Someone who had their money in S&P 500 companies would have received dividends that likely beat inflation.
If you look at a broader index like the DJIA, it’s up 5.5% over the year, not including dividends (so total return on invested capital is roughly around 7-8%, which is consistent with the average returns of the past 80 years).

Socketsite should have an end of the year recap. Best Thread, Who said what, predictions, best haiku, who changed their name most, etc. not this “Here Is What The DOW Jones Did” post. We all know the economy is awesome.

The change in the S&P 500 index only tells part of the story. Those are the largest cap stocks, which tend to pay relatively high dividends…Someone who had their money in S&P 500 companies would have received dividends that likely beat inflation.

Including dividends, the S&P 500 returned 2.11 percent for 2011. That means investors lost money after inflation, which was running at 3.4 percent in the 12 months ending in November.

And I seriously doubt that inflation is going to drop so dramatically in December that with dividends this index will be up for the year.
And the DJIA is not a “broader index” than the S&P 500, as the former has 30 large, publicly owned companies in it and the latter has, as its name implies, 500 large-cap companies. Perhaps you meant the Dow Jones U.S. Broad Stock Market Index, which is composed of the largest 2,500 stocks within the Dow Jones U.S. Total Stock Market Index. I don’t know how to look up how that index itself did this year, but I do know that the SCHB ETF tracks this index and that fund is down, -0.53% for the year.

> Europe and China, is looking pretty rocky, and I hope that does not drag us down.
if europe and/or china goes down so will the US economy since they are tightly coupled as we saw during the last financial crisis.
the coupling is easily explained by US companies do an increasingly larger share of their business overseas.
the question isn’t whether the US be dragged down, the question is: by how much?

Brahma, you’re right, the DJIA is not a broader index, but it is still a widely cited benchmark of the performance of the US stock market and $10K invested in its holdings would have grown to $10,838 (or an increase of around 8.3%) in the last year. If you had put the same $10K in, say, the Vanguard Inflation-Protected Bond Fund, it would have grown around 11.3%, to $11,323. You can see a chart in the link.
My point is just that citing only the S&P 500, and ignoring dividends, is presenting somewhat selective information when discussing the performance of the market for the year.
Personally, I’m putting my money in the market right now rather than in a house because I think over the next few years the market (bonds and stocks) will outperform home prices, and so far that’s been the case, even with the rather disappointing returns of one index this year.

Link didn’t seem to work as a reference, here it is in full:http://quote.morningstar.com/fund/chart.aspx?t=VIPSX&region=USA&culture=en-US&statePara={securities%3A[{n%3A%22Vanguard%20Inflation-Protected%20Secs%20Inv%22%2Cids%3A%22FOUSA00K6A|0P00002XFB|CU%24%24%24%24%24USD|1|1|FO|2000-6-28|||false|USA|19%22}%2C{n%3A%22BarCap%20US%20Agg%20Bond%20TR%20USD%22%2Cids%3A%22XIUSA000MC|0P00001G5L|CU%24%24%24%24%24USD|1|1|XI||||true|USA|0%22}%2C{n%3A%22DJ%20Industrial%20Avg.%20TR%22%2Cids%3A%22XIUSA000PF|0P00001G8I|CU%24%24%24%24%24USD|1|1|XI||||false|USA|0%22}]%2CchartType%3A%22GrowthChart%22%2Crange%3A%222010-12-31|2011-12-30%22%2Cperiod%3A6%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%220P00001G8I%22%2Csma%3A%220%2C0%2C0%22}

Nope. Stocks aren’t a bad investment. We all know that. Sure, there are ups and downs, but historically they have performed well. My money is (still) on stocks in 2012.
And, hanging on to real estate.
Think long term for both.

futuris wrote:
> S&P returned ave. of 11% since inception
> in 1957.
The return of the S&P does not mean anything since any time a company is not doing well (or goes BK) it is kicked out of the S&P. Only a small number of the stocks in the S&P 500 today were there in 1957. The S&P 500 kicks out companies like Kodak and the NY Times and add companies like Apple and Netflix so brokers can tell people they will get rich investing in stocks…

“Stocks are a bad investment.”
this is as true as people saying “real estate is a great investment” back in 2005.
a well thought out strategy investing in stocks and bonds won’t make one rich quickly but it should do fine long term.
the issue is that most people are terrible investors; and for a terrible investor, stocks are indeed a bad investment. as a rule of thumb: people that were saying RE was great back in 2005 (since prices never go down!), are probably better off -not- investing in stocks.

^^^Worst place I have my money is stocks = “bad investment”.
Which by the way I said in response to “the question isn’t whether the US be dragged down, the question is: by how much?” by you.
But I was talking about it in the context of not being an awesome topic to end the year on vs. best guess on the location of LMRiM.

I have a broker who has been calling me about an investment I can make with him. He takes 1.2% of the value of the assets under management every year. If the value of the assets goes down, he may peg the 1.2% fee at the old, higher value. There is a 5% back end load, which the broker takes and a 2% front end load that the broker doesn’t take, but a bunch of vendors of his do and they take very good care of him as a result. The investment isn’t projected to do very well over the next 5 years at least. I may be required to put even more money in over time that I won’t get back.
Would anyone make an investment like my broker is proposing? I think stocks look pretty good compared to that “investment”.

MG, I will absolutely concede that the DJIA is still a widely cited benchmark of the performance of the US stock market and that narrowly speaking it outperformed the S&P 500 over the course of the last year.
But once you assume that the S&P 500 is a reasonable benchmark, even if you factor in dividends, investors in it didn’t beat inflation in 2011 (see above).
Still, I understand what you’re getting at. If one assumes that an investor had their money in a DJIA-tracking fund, then they probably would have beat inflation with dividends taken into account. Haven’t taken the time to figure out what would happen with fees accounted for.
Not willing to go as far as to say that an SFH in “Prime SF” of whatever will outperform the S&P 500 over the course of the next year, however. We’ll see.

sparky-b:
Nice idea. I am actually optimistic for 2012.
Prognostication for 2012
A. Nominal bonds beat TIPS. People keep calling for rising inflation, which would favor TIPS. But I think so much expectational inflation has built into the price of TIPS that nominal bonds will do better.
B. Emerging Market Debt beats US Bonds. Their balance sheets are so much cleaner than the US.
C. Emerging Market Equity beats Developed International Equity. This is where the growth is going forward.
D. US equities (S&P 500) beats International (developed markets Europe). Does anyone see a good result coming out of Western Europe?
E. Currency. Long $ vs. developed (aka, Euro or Yen). Long commodity based currencies (Peru, Australia, etc.) vs. Euro. Caveat. If we continue to see unexpected central bank interventions (such as with Switzerland & Peru in 2011), all bets are off.
Real Estate:
A. Industrial & multi-family;
B. Senior housing & medical office.
C. Avoid: Almost anything in third tier markets.

Treasury bonds have handed investors a return of 9.66% through Thursday on the back of 5.87% gain in 2010, according to data from Barclays. The bond market was headed for the biggest calendar-year return since the 13.7% recorded in 2008.The biggest star was the 30-year Treasury bond, with a 35% return, far outpacing even gold, another favorite haven asset, which gained about 8% through Thursday. The benchmark 10-year note has posted a return of 17% through Thursday.

Emphasis added (I’m an anti-gold bug).
I agree with JustLooking that TIPS aren’t worth it; once you’ve decided to allocate money to bonds, you might as well go for the straight nominal ones because inflation is so low.
No, I don’t see a good result coming out of Western Europe; austerity isn’t going to work in the medium term and and I don’t see good enough results coming out of other developed non-US economies to cover for the negative impact of the Euro Zone’s troubles.
Emerging Market Equity’s going to be swamped by China’s contraction in 2012. Won’t be a huge thing, but I won’t bet that the MSCI Emerging Markets Index, for example, will beat the S&P 500.
For sparky-b at 6:18 PM; that was satire, he was describing the typical terms for buying and subsequently selling residential real estate.
Happy New Years, everybody!

Certainly. And I frequently do as you well know. Avoiding the question? I answered your question. You asked what the post was, as rudely as you could muster 4:38 a.m., and I told you. You don’t like the treatment of Tipster’s sameness? OK. How about you take Tipster to task for his nonsense instead? I’ll gladly hand the burden over. You seem to possess the requisite acidity.

OK. I will admit when I first read tipster’s (12/31 @ 5:04pm) comment on the the “bad investment” I was not sure what he was going on about. And then, (cue bolt of lightning), I got it. He is talking about a house.
2% to get in – title insurance, etc.
1.2% on going – RE taxes, etc.
5% to get out – Agent fee when you sell.
That was very smooth and I bow to your humor.

OK. I will admit when I first read tipster’s (12/31 @ 5:04pm) comment on the the “bad investment” I was not sure what he was going on about. And then, (cue bolt of lightning), I got it. He is talking about a house.
2% to get in – title insurance, etc.
1.2% on going – RE taxes, etc.
5% to get out – Agent fee when you sell.
That was very smooth and I bow to your humor.

tipster’s investment can also be used as a shelter for you, your kids and the generations after that. It will still retain its face value of “shelter for 5 people” 50 years, 100 years from now provided you properly care for it.
Plus it was not designed to be an investment in the first place, but was marketed as such by salesmen. But it does have some minor investment value, along with the risks that come with it. 90% of investors use leverage in this investment which counterbalances the high holding and transfer costs. It can be an inflation shelter in most cases and when viewed from a macro prospective.
Did I mention everyone lives in one? Either rented or purchased.

True, lol. However, other investments generate income from which shelter (or anything else) can be purchased. A home generates no income but does generate a lot of costs. (Yes, I’m familiar with imputed income, but then we’d be making the sound bite discussion far more complicated!)
“But you can live in a home” is sound investment advice only to a realtor who is trying to sell you that home.
On your broader point that a home is not designed to be an investment, I could not agree with you more. This is why I’ve always advised against buying a home based on investment considerations – i.e. where owning costs more than renting.

I guess we agree on everything today, A.T.
A reason for some to purchase their own home (at the right price that is) is as an inflation hedge.
With a 20-year hold and with a 3% consumer inflation / home price inflation, your mortgage will end up being 1.8 times less than when you subscribed it. Plus the 3% inflation gain is over 100% of the house.
Take a 20% down 5% mortgage for a 1M house in 2011
In 2031 the same house would be worth 1.8M if it followed a theoretical 3% inflation.
You have put 200K down, borrowed 800K, paid off 400K in principal and 640K in interest. You owe 400K but have 1.4M in equity.
You started with 200K
You spent 640K in interest payments
You shelled 400K in principal payments
Your equity is 1.4M
Opportunity cost: 3% over 20 years X 200K = 160K
Let’s say your property taxes, upkeep costs, sale costs and so on are more or less what you would have spent in rent, and that’s a very very long stretch, but I am playing the devil’s advocate there.
Even with these very pessimistic holding/transfer costs, you’re still ahead by 100K over 20 years for a 200K original investment.
That’s the traditional view, of course. The minute funny money started to flow into housing all these numbers were thrown into the trash.
But it worked for my parents. It worked for theirs too. And it worked for me so far though with much more market timing.

lol, we do agree on a lot.
But don’t forget that in your hypothetical world, a renter would have had the 200K down + the 640K in interest payments + the 400K in principal payments to invest somewhere else – you only included the opportunity costs for the 200k down and ignored the return on the rest. Assuming even a minimal return, now the renter is far ahead.
Bottom line, if you can buy for less than you can rent, buying is probably a good idea in most circumstances. If buying will cost you more than rent today, don’t count on appreciation or inflation to make up the difference as it very likely won’t. Appreciation and inflation were our parents’ world, not ours, and thus the considerations are very different today.

^^^
In an ideal world of decent annual returns, the renter would be ahead.
This mortgage would represent $4300/month. A renter able to invest it at 6% returns over 20 years would end up with… $2M in his portfolio.
But do not forget I made one major concession: I assumed upkeep/taxes/sales costs would be the same as a rent. Usually they’re not and by far. Therefore including the opportunity costs of missed investments is very hypothetical. I guess I shot myself in the foot before I got into that race…

“This mortgage would represent $4300/month. A renter able to invest it at 6% returns over 20 years would end up with… $2M in his portfolio.”
Invest what? Surely not $4300 a month. They’re hypothetically spending $3200 a month in rent. So you’re talking about 1100 a month opportunity cost, there.
And how much of the 640K in interest comes back via deductions?

As I said, I shot myself in the foot on this back-of-the-envelope calculation. Showing that pure numbers do work in theory with a leveraged purchase. You’re not losing any money for one thing, with a historical appreciation that follows inflation. Opportunity costs are very hypothetical. Your costs of ownership can have a great influence, tax savings, etc, etc… YMMV

I can make it easy. If the cost of owning is more than the cost of renting (both accounting for all costs/benefits), then after 20 (or 1 or 10) years, the renter will be ahead. Unless the home appreciates enough to make up the loss or rents increase enough so that it costs more than owning. Anyone who buys for a price that is higher than rent is banking on one or both of those events occurring. I wouldn’t take that gamble in a declining market with very low inflation, but anyone who thinks today’s losses will be made up by tomorrow’s appreciation, go for it. That worked well for a long time, but it has worked out terribly for the last five years and counting.

I can make it easy.
Can you? If you can it reamains to be seen. What you did, actually, was insert biased opinion. We’re talking, again, about this house, this rental market, and this scenario. A case for potentially buying here was clearly made. If the cost of owning is more than the cost of renting (both accounting for all costs/benefits), then after 20 (or 1 or 10) years, the renter will be ahead.
Not necessarily, as displayed above in several ways including deductions, paydown of principal, and rather small opportunity costs. Unless the home appreciates enough to make up the loss or rents increase enough so that it costs more than owning.
Always with appreciation from you. Somehow in your world inflation only works one way. Duly noted. You raise “inflation” when it suits you. Got it. Anyone who buys for a price that is higher than rent is banking on one or both of those events occurring.
Getting away from this particular scenario, that’s nonsense. People buy for lots of reasons.

lol, although home values generally do increase to track inflation on average, unfortunately, they increased far more than that since 1996, and so I think the averages favor home values not tracking inflation for a while.
As for anon.ed’s comment, it looks like the kind of comment that I don’t even read any more: probably a bunch of personal attacks with virtually no real information.

Hee hee flujie, you tried, but could not come up with a single intelligent point. And a couple are simply unintelligible – “Somehow in your world inflation only works one way” – sure, okay, makes perfect sense! I’ll just note one very obvious flaw to illustrate:
“If the cost of owning is more than the cost of renting (both accounting for all costs/benefits), then after 20 (or 1 or 10) years, the renter will be ahead.
Not necessarily, as displayed above in several ways including deductions, paydown of principal, and rather small opportunity costs.”
Of course, those costs/benefits you cite are a handful of the costs/benefits I expressly stated should be taken into account in the very sentence you quoted. But you can pretend it was a valid criticism since pretense and strawmen are obviously the best you can come up with.
I said I’d stop pointing out your patent flaws, inconsistencies and nonsense because it’s too easy – like shooting fish in a barrel – and now I mean it.

Uh huh. Pretty flat language, actually. If you’re going to attempt to provide summation you should expect to be challenged. A clear case was made with regard to SFRs in this price range. Sorry you had to bring out the “hee hee” and diminutives. But what can I say? It’s all too typical.

sparky-b, next time you’re dismayed by the socketsite editor posting one of these “”Here Is What The [S&P 500] Did” posts and are wondering what the relevancy is (in addition to everything that’s already been said earlier in this thread), keep in mind that people, when making their “rent vs. buy” calculations, take into account things like the following:

A renter able to invest it at 6% returns over 20 years would end up with…$2M in his portfolio.

Putting aside the very valid objections that [anon.ed] raised for now, on its face this sounds like a reasonable assumption given the performance of the U.S. stock market over the post WWII period. But given how things have been going for most non-hedge fund manager investors over the last twelve years, if I could reliably make an annualized average of 6% over the next twenty years, I’d consider myself very lucky indeed.

Brahma,
I was more dismayed with the way this was the end of the year post vs. something more holiday festive.
Other than that I agree with you. I would love to be getting 6% on my stock market money. I have not seen that at all, more in line with the post topic= flat. I am interest in where people are making good investments and am not selling the ‘house as investment’ line. Yet when I ask the assumption is I am trying to say BUY REAL ESTATE. Such as the tipster snark.
But hey that’s life all you can do is look at the bright side, put a smile on your face, say yes, and try to be more visionary. Maybe I shouldn’t look at the stock market for my brand new be more visionary outlook. Maybe startup Slovakian spirit sales.

“The return of the S&P does not mean anything since any time a company is not doing well (or goes BK) it is kicked out of the S&P. Only a small number of the stocks in the S&P 500 today were there in 1957. The S&P 500 kicks out companies like Kodak and the NY Times and add companies like Apple and Netflix so brokers can tell people they will get rich investing in stocks…”
This issue is called survivorship bias and would be an issue if you calculated returns by looking at today’s S&P 500 companies vs their historical prices. A correctly done calculation of investor return should already take this into account though. Just like an index fund would you calculate returns as if you sell when firms drop out and buy when they are added to the index.
As mentioned above dividends and inflation are key things to add into the calculation as well.
The survivorship bias issues rears it’s head most often when fund companies advertise the returns of their entire family. If you make a stock bull & bear fund, housing bull & bear, bond bull & bear fund, … and then a few years later shut down or spin off the losers and keep the winners it’s pretty easy to show your entire family “beating” the market.
“if I could reliably make an annualized average of 6% over the next twenty years, I’d consider myself very lucky indeed.”
There are studies out there looking at the average returns of individual investors vs returns of the market and they generally show significantly lower realized returns for individual investors. Mostly this seems to be due to investors on average buying high and selling low as well as the impact of fees. There’s good reason to believe that the tendancy to anti-time the market is more a characteristic of individuals rather then the market itself (stocks or bonds or houses). As tipsters alluded to above, the issue of fees/transaction costs applies across many markets as well.

1. What difference does it make that they kick stocks out of the index. I can buy an index fund. When they kick stocks out, the fund sells them. Index investing typically does best over the long run, so just do that and you get the advertised return.
2. The point of my post was made better by sparky than I could ever have stated myself: with all those fees, no one would ever choose real estate as an investment if it were a mutual fund. Except in bubble times, and times of high inflation, it’s really a lousy investment.

The Fed just put out a white paper on the state of the housing market and endorsing a REO to rental program to sell REO’s into the rental market, possibly in bulk.http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf
This has been brought up here a few times and some people have commented that REO’s are not located in suitable areas for this, but the fed seems to have concluded that “many” such properties are suitable:
“Not all of these REO properties are good candidates for rental properties, even in geographic markets with sufficient scale. As discussed in more detail later, some properties are badly damaged, in low-demand locations, or otherwise low value. Nonetheless, according to Federal Reserve staff calculations, many REO properties appear to be viable rental properties in terms of both physical adequacy and potential attractiveness to tenants. For example, most REO properties are in neighborhoods with median house values and incomes that are roughly similar to the medians for the metropolitan area overall. Similarly, the vast majority of REO properties are in neighborhoods with an average commute time that is similar to the average for the entire metropolitan area, suggesting that the properties are not located unusually far from employment centers.”
Not letting REO’s and other shadow inventory sit idle seems like a great idea to me as vacancy causes value loss and blight. Since the bubble pushed some people into homeownership that weren’t really suitable for it, increasing rental supply and driving down rents seems like a good idea. But I think getting properties to some productive use is far more important then what use (rental vs OO) they are put to. It is worth noting that since rent/OER is used to compute inflation while home prices are not the Fed has a horse in the race here with respect to renal vs OO.
On a side note, Interesting to see their figure 4 that even though rates are low and dropping, variable rate delinquencies are much higher then fixed.

Hate to be a conspiracy monger, but it seems like a covert strategy to take their homes off the market so that the banks can continue to unload their inventory with the better results. I don’t see the government initiating a rental program anytime soon.

“I don’t see the government initiating a rental program anytime soon.”
They’re not proposing a government run rental program, rather changes to make sales (particularly bulk sales) to landlords easier.

“The Fed just put out a white paper on the state of the housing market and endorsing a REO to rental program to sell REO’s into the rental market, possibly in bulk.”
Unnamed source in this CNBC piece claims that the REO to rental program isn’t just some academic musing of a fed economist but close to being launched in pilot stage.
“A number of institutional investors have shown appetite and interest in bulk REO deals, according to officials, but the plan has to incorporate ways to help facilitate financing. That has been one of the biggest roadblocks to deals already in the works between hedge funds and the major banks. Sources close to these private bank negotiations say there is plenty of cash to buy properties, but building out a management structure for the rentals is pricey, and some investors are finding the math doesn’t add up to make it worth their while.”
[…]
“While much of this program will focus on local areas of distress, officials say they are looking at where the assets are today but are really more focused on where all the foreclosures will be in the future. It’s not about the stock of foreclosures currently, it’s about the flow of them over time and alternative ways to manage that flow.”http://www.cnbc.com/id/45925851
The point regarding profitability is probably a negotiation on price.
The last part is notable since there are currently a number of loans where payments are not being made, but haven’t yet been foreclosed and thus aren’t in the current REO counts. Not much incentive for banks to push them through the process only to have the homes sit on their books. Having investors lined up ready to buy the homes would seem to provide incentive to speed up the process.